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U.S. income gap a danger to Canada: TD

The increasing gap between rich and poor in the U.S. is a danger to Canada’s economy, according to a new report from TD Economics.

“Rising income inequality in the United States is a clear and present danger to Canada because there are pressures on our economy to go in the same direction,” Craig Alexander, chief economist at TD Economics, said in an interview.

“We will probably never reach U.S.-type inequality because Canadians would never accept it, but I think there are pressures that could push us in that direction.”

As a result of those pressures, governments must take added precautions to ensure that new policies don’t make the current gulf between high and low-income earners even wider, Alexander said.

“I worry that governments don’t think about income inequality considerations when they’re designing policy. They design policy to achieve particular public policy or political goals and income inequality is an unintended byproduct,” Alexander said.

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“Income inequality in Canada has risen to the point where it is legitimate when thinking about new public policy to consider whether those policies will increase income inequality. If it will, we need to have a conversation about whether we should go forward with that policy or whether there will be an off-setting program to ameliorate the impact.”

The special report from TD Economics, called The Case for Leaning Against Income Inequality in Canada, was released on Monday. It was written by Alexander and senior economist Francis Fong.

The issue of the rising gap between high and low income earners has taken centre stage in Canada and the U.S. in recent years, particularly amid growing evidence that traditional middle-class jobs in both countries are under pressure from changing technology and globalization.

In the U.S., some 20 per cent of total income goes to the top 1 per cent of earners. In 2007, considered the peak of income inequality in Canada, the top 1 per cent earned 14 per cent of total income. It has since declined.

In both countries, there are growing calls to increase taxes on the rich and boost the minimum wage. But there are also worries that doing so will slow economic growth.

The reality is more nuanced than what is typically portrayed in the media and political discussions, Alexander said. “It’s often portrayed in a black and white fashion. The issue is complicated. There are a lot of moving parts.”

The TD report notes that the gap between high and low incomes in Canada was relatively stable through the 1970s and 1980s.

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That changed in the 1990s when governments began cutting transfer payments and support for low-income earners as they tried to cut deficits and balance the books.

But when governments found themselves back in surpluses, the policies they put in place didn’t reverse the growing gap between rich and poor, Alexander said. “In other words, it became a permanent feature.”

Income inequality has been relatively flat since 2000, but that may also be as a result of the boom in resources and real estate prices. These forces, Alexander believes, have been keeping incomes and wealth for middle-income Canadians buoyant.

“I’m worried that if the real estate and commodity booms don’t persist – and we know that booms don’t last forever – that when that dissipates, we’re going to see middle-income Canadians under more pressure.”

Because our economies are so closely integrated, Canadians companies face increasing pressure from employers in the U.S., where some workers are paid much less, the TD report said.

“When our employers sit down and think about their wage scales for the coming year, they look at their competitors in the United States and they can see the cost of doing business there is much lower. What’s an employer to do? They have to stay in business and it creates really pressure,” Alexander said.

New investment in the automotive sector, for instance, has gone to the southern U.S. and Mexico, where workers earn less than their Canadian counterparts.

At the same time, the persistence of low productivity in Canada’s economy means that incomes aren’t rising as quickly as they could be, the report notes.

The TD report says that tax policy and redistribution will only go so far to make Canada more equitable.

But governments can support low-income workers with policies that support health, affordable housing, child care, and education and skills training, the report said.

“We need better outcomes for aboriginals and immigrants. We need more equitable access to affordable child care,” Alexander said. “These are all things governments can influence that might be achieving other policy goals that can actually help reduce income inequality.”

On income inequality, Canada is running at about the middle of the pack compared with other industrialized countries. However, Canada currently has higher social mobility compared to other industrialized nations, Alexander said.

Some degree of income inequality is considered good for the economy because it gives workers incentives to work harder, but high levels of inequality are a detriment.

The challenge is that economics has actually not found a way of measuring where you cross the threshold, Alexander said.

“In my opinion, it’s an inescapable conclusion that the U.S. has gone past the threshold and high income inequality is actually holding back the economy,” Alexander said.

“When I look at Canada, the story is more mixed. I think there’s a feeling that it’s too elevated, but we can’t actually prove that we’re past that point.”

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